Oil declines on Doha negotiations; Asia-Pacific markets mixed

Summary:

• Brent crude dropped by roughly $2 per barrel amid a third day of discussions in Doha between Iran and Qatar. Tehran's plan outlines a reopening of the Hormuz strait in two days, contingent upon US compliance with its demands.
• Shipping attacks persisted, with a tanker struck by two projectiles north of Saudi Arabia in the Gulf. At least ten such incidents have been logged throughout the region from October 31 onward.
• Goldman Sachs revised its December Brent estimate upwards to $105 from $90. The revision factors in a significant disruption risk from the Middle East and the Russia-Ukraine conflict.
• Chinese equities mounted a solid rally. Reports indicated regulators would convene to discuss market support tools, while the central bank initiated daily overnight operations at a 1.25% rate.
• The yen softened despite Finance Minister Katayama's cautions against erratic moves. The Canadian and New Zealand dollars also fell, while other major currencies remained range-bound.
• South Korea's Kospi headed regional advances with a 2.8% gain. Markets looked ahead to the RBA decision on Tuesday, which is broadly anticipated to be a hike.

Oil and the Gulf

In Asian trading, Brent crude slipped by roughly $2 a barrel. Market focus remains on the Doha negotiations and the prospect of them advancing sufficiently for Donald Trump to delay any new military action against Iran.

According to Iranian Foreign Minister Abbas Araghchi, Qatari intermediaries convinced Tehran to compress its timetable for restarting Hormuz traffic to a two-day window. Day one would see the US enact specific steps, with shipping resuming on day two.

Tehran's requirements cover sanctions easing, the reinstatement of oil waivers, a smaller US military footprint, and acknowledgment of altered shipping lanes.

There has been no official response from Washington, and Trump stated he was in no hurry.

As long as the talks proceed, the market will probably incorporate some likelihood of a peaceful resolution into its pricing. Nevertheless, the significant divide between Washington and Tehran, coupled with the ongoing maritime strikes, might constrain the depth and lasting nature of any sell-off triggered by a temporary easing of tensions.

The situation regarding maritime security worsened. A tanker was hit by two unidentified projectiles 72 nautical miles east of Ras al Khafji, Saudi Arabia, far from the Hormuz strait, according to the UK Maritime Trade Operations centre. The entire crew was safe. Maritime security accounts indicate at least ten incidents in the Gulf, at Hormuz, and in the Gulf of Oman since October 31. Iran's Revolutionary Guards stated they struck two crude tankers on an unapproved route. Another vessel was reported possibly on fire off Oman, and satellite images revealed a leaking tanker leaving an oil slick heading for the Omani coastline.

Non-Gulf supply risks were also highlighted. Ukraine renewed its drone strikes on Russian oil refineries over the weekend. Goldman Sachs lifted its December Brent projection to $105 from $90, factoring a 1 million barrels per day disruption allowance into its 2027 baseline scenario. OPEC+ did not alter its December production goals.

China

Stocks in China saw a strong recovery. Sentiment was boosted by reports of a Monday meeting between the People's Bank of China, financial and securities regulators, and major banks. The agenda concerns enhancing a relending scheme for buybacks. This follows the CSI 300's most challenging month in over ten years. By the midday pause, the Shanghai Composite had risen 1.16%, the Shenzhen Component 2.39%, and the ChiNext 3.28%.

The PBOC also launched daily overnight reverse repo transactions at a fixed 1.25%, lower than the 1.4% seven-day rate. This represents a move towards establishing the overnight rate as its primary policy gauge. Weekend and Monday data painted a conflicting image of Chinese manufacturing. The official NBS manufacturing PMI dipped back into contraction, registering 49.3 in October against 50.1 previously, falling short of projections. The non-manufacturing index dropped to 49.7. Broadly diverging, the private RatingDog manufacturing PMI, weighted towards export-focused companies, stood steady at 52.0, surpassing forecasts. Output expanded at its swiftest speed since April. Faced with fierce rivalry, manufacturers reduced their selling prices.

Japan

The yen weakened despite Finance Minister Satsuki Katayama's remarks that a joint currency accord with the United States was still active and that Tokyo would intervene against erratic movements. She offered no comment on particular exchange rate levels. Japan's manufacturing PMI slackened to a seven-month trough of 53.3, but stayed firmly in expansionary territory. Input cost inflation accelerated.

Australia

Financial markets assign a high probability to a Reserve Bank of Australia rate increase on Tuesday. A Reuters survey of economists found 31 out of 32 predict a rise to 4.85%. Deutsche Bank stands alone among major forecasters in foreseeing a pause. Australia's manufacturing PMI sustained at 49.6, marking a second consecutive month of contraction.

FX

Beyond the softening yen, the Canadian dollar declined following weekend statements from Trump and Prime Minister Mark Carney on a possible trade pact. Trump described it as existing in 'concept' without providing specifics. The New Zealand dollar recorded a drop as well. Other key currencies fluctuated within tight confines.

Regional equities

• China's Shanghai Composite index rose 1.2%
• Hong Kong's Hang Seng added 0.6%
• Japan's Nikkei gained 0.4%
• South Korea's Kospi jumped 2.8%
• South Korea's Kosdaq advanced 1.6%